Strategic CSR boosts social profit

The development of the concept of corporate social responsibility (CSR) in recent years has tended to isolate Milton Friedman, the economist noted for his view that the social responsibility of business was to maximise profits within the bounds of the law.

by Journal of Management Studies, Vol 43 Issue 1, January 2006
Last Updated: 23 Jul 2013

However, research published in the Journal of Management Studies explores the possibility of a business maximising profits and social performance simultaneously.It uses the tools of microeconomics to examine a business in three different situations: as altruist, as coerced egoist and as strategist.

In the first scenario, one problem with corporate altruism is that it can only work in the longer term if there is an imperfect market. This is because in a perfectly competitive market, or one where freedom of entry makes an imperfect market perfectly contestable, an incumbent business will lose market share to more efficient rivals if it engages in wasteful activities, such as social investments where there is limited chance of a return.

Such wastefulness reduces the company's competitiveness and leads eventually to either bankruptcy or takeover by a more efficient firm. The company's ability to make voluntary CSR investments that are not oriented towards profit maximisation is necessarily due to its enjoying some form of market power.

The case of the coerced egoist occurs when the business participates in social activities out of concern for what might happen if it does not. The most obvious example is a company that avoids polluting for fear of being fined or shut down by the government. But other, non-regulatory factors can effectively force a business to participate in social activities. For instance, a business that does not worry about training might experience low productivity, which will affect competitiveness and profits. In such circumstances, decisions about how much to spend on social programmes are very much about cost-benefit analyses.

The final case concerns the business that invests in social programmes in a strategic way. In other words, such a business obtains an additional benefit - good reputation, differentiated products that attract a premium or better staff - deliberately, and thus achieves greater profitability.

Perhaps unsurprisingly, it appears to be better for a business to act strategically rather than react to a coercive political and social environment. Moreover, it also appears that a strategic focus achieves a higher social output than occurs with a coerced egoist.

Some might argue that the altruistic case might be better still. Recent years have seen a move towards businesses being managed for the benefit of stakeholder groups other than traditional shareholders. This approach results in greater social output, although probably in lower social profits for the firm.

They suggest, however, that the overall social output by the entire business community will be greater under the strategic case. Incentives will be aligned so that the firm will be motivated to improve its social performance and increase its social output.

Source: Taking friedman seriously: maximizing profits and social performance
Bryan W Husted and José de Jesus Salazar, Tecnológico de Monterrey and Instituto de Empresa, and Tecnológico de Monterrey
Journal of Management Studies, Vol 43 Issue 1, January 2006

Review by Roger Trapp 

Journal of Management Studies, Vol 43 Issue 1, January 2006 recommends

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